Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods

Professor Jacob S. Ziegel, University of TorontoJuly 1981

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Article 25

A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a
result.

COMMENT

1. Article 25 is a key article because the remedies of the buyer and seller under CISG turn on the character of the breach involved. Generally speaking, if the breach is fundamental the aggrieved party is entitled to avoid the contract; if it is not, he is remitted to a claim in damages although in appropriate circumstances he may also be entitled to seek an order for specific performance. See art. 49,64.

2. The common law rules are different and more complex. The OSGA adopts an a priori system of classification into warranties and conditions with respect to the implied terms of title, description, merchantability, fitness and sale by sample. The breach of a condition, as thus defined, prima facie entitles the aggrieved buyer to reject the goods and avoid the contract, even though the actual breach is minor in character. (In the interests of conciseness I ignore the important qualifications to this rule in ss. 12 and 34-35). With respect to stipulations as to time, s. 11 provides that, unless a different intention appears from the terms of the contract, stipulations as to time of payment are not of the essence and that whether any other stipulation as to time is of the essence of the contract depends on the terms of the contract. So far as other express terms of the contract of sale are concerned, it was for a long time assumed that they would also have to be classified a
priorily into warranties and conditions regardless of the severity of the breach.

However, the contrary was held in Cehave N.V. v. Bremer H.G. (1976) Q.B. 44, and as a result of this and other decisions
[in particular, Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (1976) 1 W.L.R. 989
(H.L.)] many observers now detect a trend to bring the law of sales into closer alignment with the general rules governing the consequences of a breach of contract as laid down in the Hong Kong Fir Shipping Co. case
[Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. (1962) 2 Q.B. 26
(C.A.)]. This is that they should be governed by the severity of the breach and not turn on the a priori classification of the term breached.

3. It will be seen therefore that the remedial regime adopted in CISG is not fundamentally opposed to the rules in other branches of Anglo-Canadian contract law and the integrative movement observable in the law of sales. Some lawyers may regret the loss of certainty provided by a system of classification into warranties and conditions, but others will argue that the certainty is bought at too high a price. Mercantile practice itself, with the possible exception of stipulations as to time in the international commodities trade, seems to support the CISG approach. In any event, CISG does not leave the parties adrift in a sea of uncertainty. First, so far as time is concerned, CISG has borrowed the German concept of Nachfrist which enables the aggrieved party to treat a delay in performance as a fundamental breach if the breach is not cured within a reasonable time after notice.
[See CISG 47, 63]. Secondly, the parties are always free to make other arrangements with respect to the consequences of a breach and will no doubt frequently do so where stipulations as to time are concerned.

4. I therefore support the CISG approach. However this does not end the inquiry and it needs to be further asked what types of breach should be sufficient to entitle the aggrieved party to avoid the contract and whether it is appropriate to describe such a breach as a fundamental breach. For the purposes of art. 25 a breach is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract unless he could not reasonably have foreseen such a result. This test is substantially more stringent than the test in the original version of art. 25. This merely required proof of "substantial" detriment to the other party. The change was adopted at Vienna, presumably to accommodate the sentiment that an aggrieved person should only be entitled to avoid a contract for very serious breaches.

5. In my view, the new test is too severe and will make it very difficult in practice for a seller or buyer (but particularly a buyer) to cancel a contract because of defective performance by the other. The other common law delegates at the Vienna Conference were not as disturbed by the change as I was and seemed to feel that verbal formulae do not much matter since they are all subject to interpretation by the courts. I am not as sanguine and still feel that the definition will lead to undesireable results. However, it should be borne in mind that the parties are free to adopt their own definition and in practice it is very common for seller to limit, or even exclude entirely, the buyer's right to reject defective goods and to cancel the contract.